How Yahoo’s Decision to Stop Telecommuting Will Increase Innovation

Marissa Mayer’s decision to require Yahoo employees to “come into the office” has already been criticized by many. But most of the criticisms that I have come across have been based on emotion rather than data. If you understand the science behind increasing innovation through face-to-face interaction, her decision can only be classified as “a brilliant business decision.”

Innovation Has a Higher Impact on Profitability

There is data to support the fact that telecommuting has several major benefits. It saves millions in real estate costs, it can help in recruiting, it helps the environment, and it certainly makes some workers happy. But telecommuting unfortunately reduces innovation. And because innovation brings in much higher profits than the traditional goal of corporate efficiency, many firms are now learning the value of emphasizing innovation as a primary strategic business goal.

Dramatic Action Was Required Because Yahoo’s Performance Simply Doesn’t Come Close to Its Competition

Let’s start with the basic driver of this action, which is a long history of weak business results. The business performance at Yahoo has been less than stunning compared to almost any competitor, indicating that something dramatic was required. Google for example is ranked #3 in market capitalization (at $259 billion), which is a 10 times higher market cap than its direct competitor Yahoo. Yahoo, a much older company, is ranked way down at #238 (with a market cap of a mere $24.5 billion dollars).

Yahoo’s current workforce also dramatically underperforms. Apple’s employees produce 6.5 times more revenue per employee, Facebook employees produce three times more revenue per employee, and Google employees produces double Yahoo’s revenue per employee (Yahoo’s average employee produces a mere $352,100 each year, compared to Apple’s astounding $2.2 million). With both Google and Apple thriving, if Yahoo wants to return to its formal role as a serial innovation firm it will have to do a number of dramatic things, so this telecommuting decision is likely to only be the start of major change.

Data Supports the Need for Face-to-face Interaction in Order to get Innovation

Yahoo’s CEO comes directly from years of work at Google, a fact driven company where “data talks”. Marissa Mayer’s herself is a computer scientist from Stanford, so she certainly loves data and the scientific approach. She has a long established track record of making major decisions based on hard data & science and this decision to bring its workers in to the office is certainly a decision supported by data. Firms like Apple, Google and Facebook simply don’t wait for innovation to happen by chance; instead, top firms use data in order to proactively increase innovation and collaboration.

Google long ago calculated the tremendous economic value of innovation, and it even has a formula for increasing it. Google has determined that innovation comes from three distinct factors: discovery (i.e. learning), collaboration, and fun. Zappos, a non-tech firm, has eliminated most telecommuting because it also has learned the economic value of face-to-face interaction and fun (everyone leaves by the same door). Pixar is famous for its centralized bathrooms, because Steve Jobs knew the economic value of increasing serendipitous interactions.

A comprehensive study by Isaac Kohane of Harvard Medical School has reinforced the internal data gathered by Google by scientifically demonstrating the positive impact of employees who work in close proximity. He dubbed it the “water cooler effect” because of the power of informal interactions. The pharmaceutical company Glaxo Smith Kline even found that increasing interactions through open office designs can increase decision-making speed (which is essential in getting innovations to market) by as much as 45%. Even co-working sites (where workers from different firms work side by side) have learned the value of interactions between people from different functional areas.

Why Face-to-face Interaction Is Such a Powerful Driver of Innovation

Telecommuting is simply not amenable to a high volume of interactions. For example, if you sent someone working remotely 50 emails every day or 50 telephone calls, they would certainly not be happy about it. However, no one complains if the same 50 interactions occurred between coworkers at the office. Face-to-face interactions between employees from different functional areas are powerful because:

Interaction increases collaboration — talking to others who individual employees don’t normally work with can spur either of the parties to want to work together and collaborate on a project either immediately or in the future. This collaboration makes it easier to staff highly effective cross-functional teams.
Questions increase sharing — the common question between two workers from different areas is “what are you working on?” Fortunately, this question increases best practice and idea sharing.
Interaction provides new solutions — when someone mentions in a group setting that they’re having a problem, the odds of getting an outside-the-box solution increase if the employees they are talking to work in a different function with a different perspective. Face-to-face interactions with customers and vendors are also much more likely to occur if everyone works in the same office.
Interaction increases competition and energy — if when encountering a coworker they highlight their recent successes, recognition, or rewards, the odds are that the people they interact with will be energized to match their success.
Interaction increases learning — obviously conversations between individuals from completely different functions allows both parties to learn about problems, solutions, and new ways of thinking that no one in their working group would likely be aware of.
Interaction provides you with ideas — talking to others and even relative strangers may spur new ideas or reinforce your current ones.
Interaction breaks down functional silos — functional silos slow down decision making and time-to-market, so any increased interaction with those who work in overhead functions will likely increase their understanding of the problems faced by engineers and reduce roadblocks.

Serendipitous Meetings Can Be Consciously Increased

If your corporate goal is innovation, firms must take positive actions to increase the number of interactions. Google and Facebook have led the way in purposely increasing the number of serendipitous face-to-face interactions by using new office designs, standing desks, creating walking patterns that increase interactions, and by offering fun on-campus activities. Google HR even measures the length of the café lines for food in order to maximize these interactions. Face-to-face interactions have been increased through what might seem like bizarre actions like a laundromat at Google headquarters and a free ice cream/bakery at Facebook. Even a free Wi-Fi shuttle bus to work increases interactions between employees who don’t work in the same business unit.

Additional Reasons Supporting Yahoo’s Decision

Some additional reasons supporting the end to telecommuting at Yahoo include:

It needs to rebuild its culture — everyone realizes that Yahoo must rebuild its corporate culture and almost everyone agrees that the best way to do that quickly is through numerous face-to-face interactions so that everyone can “see” the new desired behaviors.
A shared sacrifice will build cohesion — having many employees make sacrifices at the same time (shared sacrifice) will build cohesion among employees.
In tight economic times you can demand more — given the weak economy, fewer telecommuters will likely quit as a result this decision.
Building an employer brand message — Yahoo’s image as an employer has been damaged over the last few years, so taking bold action like this has certainly gotten everyone talking about Yahoo. And a side benefit may be that this bold decision may send a message to innovators that “things have changed” at Yahoo.
Potential turnover — because Yahoo has a long history of numerous layoffs, you simply can’t argue that this decision is an attempt to reduce the workforce. Because of all the turmoil and the many layoffs at Yahoo over the last five years, many innovators left the firm long ago. The turnover as a result of this decision will be less impactful and the slots opened up can now be filled by new innovators.
The workforce is relatively young — because of the youth of its workforce, Yahoo employees have fewer child care and elderly parent care issues than many firms.
Force versus enticement — since the new CEO joined, Yahoo has tried to become “Google-like” by providing free food, mobile phones, and shuttle buses. However, the Google “casino like” approach is distinctly different in that it uses positive features to entice and encourage employees to come in and to work long hours. The Yahoo approach of requiring it, even though it may be necessary, may cause many unintended problems.

Final Thoughts

The decision by Yahoo to take dramatic action in order to speed up its return to becoming a serial innovation firm again may seem harsh to those with what I call “a social work mentality.” Hard-nosed businesspeople and shareholders however understand the economic value of innovation, so they already realize that Yahoo may be in a life-and-death situation and that the only way to save every employee’s job may be to immediately shift into innovation mode. And that shift simply can’t happen rapidly without the necessary face-to-face interactions that come with showing up to the office every day. Because of this bold and necessary decision, I predict that Yahoo will show dramatically improved business results in as soon as 18 months.